We only manage what gets measured, and accounting drives what gets measured.

Increasing productivity has been the big driver of the decline of manufacturing employment and we really should be trying to create incentives for manufacturing businesses to make use of employees.

That brings us to accounting…

We all know investors call the tune in the private sector, and they look to the financial accounting of the firms in which they invest to decide whether to buy or sell them. As a result, executives of those companies do everything they can to make their financial numbers look good. What constitutes well? Profit, of course, which is revenue minus costs. But how we calculate revenue is tricky, and how we calculate costs is even harder.

The Story

Consider, the difference between buying a robot and hiring a worker. Both are costs, but they are treated very differently by accounting, with big implications for investors. A dollar spent on a robot counts as an asset, with assets sitting across the balance sheet from costs and helping to cancel them out. A dollar spent on employees, in contrast, counts as an expense. That’s true even if the spending is on training, which an untutored person would think sounds like an investment.

The Risk

It gets worse for employees because there is no place in accounting to recognize investments in them. That spending is parked along with “administrative expenses,” which includes such things as office furniture, pencils and paper. Investors want to see administrative expenses be as small as possible because it seems to indicate that the business is efficient. If there is anything investors hate as much as expenses, it is risk because it makes an asset less valuable.

The Humour

Idea of labor being a fixed cost is bit strange, given how quickly most companies get rid of excess workers when business declines. It’s far harder to get rid of a capital investment such as a robot when business turns downward. We call them “assets” in accounting, but go ahead and try to unload those robots from your assembly line on Craigslist when you don’t need them.

More Trouble

Accounting throws one more wrench into hiring decisions. Most accounting systems create incentives to engage contractors and temp workers, even for long periods of time, rather than hire regular employees. The reason is that contract work, spending on temps and other ways of engaging workers without hiring them don’t appear on balance sheets as “employment” expenses with all the negative baggage of fixed costs. They show up elsewhere, typically as “services.” That doesn’t look as bad to investors as does hiring the equivalent number of employees, even when they stay just as long as regular employees do and even if the total expenses of engaging contractors or temps is greater than the cost of an equivalent number of direct hires. (It usually costs 25% to 30% more.)

The Conclusion

All this is worth bearing in mind when we think about where the good jobs have gone and what we can do to bring them back. Want to learn accounting & bring out a change? Zell education provides ACCA classes in Mumbai with other exciting events to get you ready for future.

 

Based on an article by Peter Cappelli
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